Report Urges Bankruptcy Protection for Risky Student Loans

Submitted by Doug Lederman on August 21, 2013 - 3:00am

A think tank report released Tuesday argues for making student loans -- but only some student loans -- dischargeable under federal bankruptcy laws. The report[1] from the Center for American Progress joins other recent calls for more protection for distressed borrowers than they now have, but it recommends targeted rather than blanket bankruptcy protection for student loan borrowers, based not on their source (the federal government or private lenders) but on the repayment terms and the educational and repayment track record of the institutions whose students received them.

Under the plan, certain types of products could qualify as "qualified student loans," which would both need to meet set definitions of borrower-friendly terms (low interest rates, access to favorable repayment options) and be available only to students at institutions and academic or training programs that "by virtue of their graduate employment rates" or other outcome measures "give graduates a reasonable chance to repay." Qualified loans would not be dischargeable in bankruptcy, but all loans that did not meet that definition would be.

The group argues that moving to such a system would prod lenders to create loans that were better for borrowers, and discourage predatory practices because both lenders and, quite possibly, institutions could be on the hook if loans that didn't "qualify" were able to be discharged in bankruptcy.

"Including some student loans in bankruptcy reforms and expanding borrower protections through Qualified Student Loans will ultimately maintain bankruptcy as the narrow path of last resort it was designed to be, while giving those burdened by student debt a chance for a fresh start," says the center's report, which was written by Joe Valenti, director of the center's asset building program, and David Bergeron, a longtime Education Department official who is now its vice president for postsecondary education.